Free Insurance Licensing Life-Producer Practice Exam with Questions & Answers | Set: 2

Legal capacity to contract.

Maryland contract law requires parties to have legal capacity to enter into a binding agreement.

Evaluate each option.

A. Intoxicated individuals

May lack capacity if intoxication impairs understanding.

B. Mentally ill individuals

May lack capacity depending on severity and adjudication.

C. Minors

Generally lack full contractual capacity.

D. Retired individuals

Retirement status does not affect legal capacity.

Insurance relevance.

Producers must ensure applicants have legal capacity to avoid voidable contracts.

Conclusion.

Retired individuals have full contractual capacity, making option D correct.

When a death claim is filed on a life insurance policy with an outstanding loan:

Deducted from the face amount (A): The death benefit is reduced by the loan balance plus any accrued interest, ensuring the insurer recovers the outstanding debt.

Beneficiary obligation (B): Incorrect. The beneficiary receives the adjusted benefit without personal liability for the loan.

Claim against the estate (C): Incorrect. The loan is tied to the policy, not the estate.

Canceled without adjustment (D): Incorrect, as insurers must recoup the loan amount from the death benefit.

Purpose of key person life insurance.

Key person (key employee) life insurance is designed to protect a business against financial losses resulting from the death of an individual who is critical to the company’s success.

Evaluate each option.

A. Loss of leadership

A valid reason; leadership loss can disrupt operations and strategy.

B. Reduction of profits

A valid reason; key individuals often generate revenue or manage profit centers.

C. Loss of new business

A valid reason; sales executives or innovators often drive growth.

D. Increased pension liability

Not a valid reason; pension obligations are unrelated to the purpose of key person insurance.

Maryland insurance context.

Maryland recognizes key person insurance as a legitimate business risk management tool, but its purpose is income and continuity protection, not funding employee benefits.

Conclusion.

Increased pension liability is unrelated to key person coverage, making option D correct.

Group life insurance policies in Maryland typically include a conversion privilege allowing former employees to convert group coverage to an individual policy within a 31-day period after termination, regardless of premium payment status.

$50,000 under the group plan (A): Correct. During the 31-day conversion period, the original group coverage remains in effect. If the insured dies during this time, the death benefit is paid under the group plan.

$50,000 under the new policy (B and C): Incorrect, as the conversion policy does not become effective until the first premium is paid.

Nothing at all (D): Incorrect, as coverage is still active during the conversion period.

Maryland law mandates that life insurance policies include a clear and concise description of the policy on the first page to ensure transparency and understanding for policyholders.

Legible and brief description (A): Correct. This ensures the buyer can quickly identify key terms and benefits of the policy.

Notary seal (B): Not required for delivering life insurance policies.

Premium coupon book (C): Optional, often replaced with digital billing methods.

Financial statement of the insurer (D): Not required in the policy itself, although insurers must provide financial stability information upon request.

Understanding multi-life insurance policies.

Some policies cover more than one insured under a single contract.

Evaluate each option.

A. Modified life

A premium structure, not a multi-life policy.

B. Joint and survivorship

Pays upon the death of the last insured, not the first.

C. Convertible term

Refers to conversion rights, not number of insureds.

D. Joint life

Correct. Pays the death benefit at the first death.

Common uses.

Often used in business arrangements or family protection plans.

Conclusion.

A joint life policy pays upon the first death.

Maryland’s Unfair Claim Settlement Practices standards.

Maryland law requires insurers to:

Promptly investigate claims

Act in good faith

Attempt fair and equitable settlements when liability is clear

Analyze each option carefully.

A. Compromise settlements when facts are in question

This is a legitimate and encouraged claims practice.

B. Denying coverage after timely investigation

Permissible if the denial is based on policy terms.

C. Failing to promptly investigate and settle legitimate claims

This is a classic unfair claims settlement practice under Maryland law.

D. Compelling litigation when a real dispute exists

Allowed when coverage is genuinely disputed.

Good-faith obligation.

Delays or failures to settle valid claims undermine the insurer’s duty of good faith and fair dealing.

Regulatory consequences.

Such conduct may lead to:

Administrative penalties

Market conduct actions

Civil bad-faith exposure

Conclusion.

Failure to promptly investigate and settle valid claims is an unfair claims settlement practice.

Unfair trade practices under Maryland Insurance Law.

Maryland Insurance Article Title 27 and related regulations prohibit misrepresentation, false advertising, and defamation in insurance transactions.

Evaluate each option.

A. Misrepresenting policy benefits

This is expressly prohibited and considered an unfair trade practice.

B. Misrepresenting insurance as shares of stock

This is a classic example of illegal misrepresentation under Maryland law.

C. Publishing false derogatory statements about an insurer’s financial condition

This constitutes defamation and is an unfair trade practice.

D. Sharing commissions with agents who have equivalent licenses

This is permitted in Maryland, provided all parties are properly licensed for the same line of insurance.

Conclusion.

Commission sharing among equally licensed agents is lawful and therefore not an unfair trade practice.

Purpose of the notice of information practices.

Maryland insurance law requires insurers to inform applicants about how personal information is collected, used, and disclosed.

Evaluate each option.

A. Request information

Incorrect. Applications collect information; notices explain practices.

B. Provide information as it is gathered

Incorrect. The notice explains procedures, not the actual data.

C. Describe methods used in gathering information

Correct. This includes medical reports, consumer reports, and investigative sources.

D. Prohibit collection

Incorrect. Applicants may have access rights, but cannot generally prohibit lawful collection.

Consumer protection relevance.

Transparency in information practices supports informed consent and fair dealing.

Conclusion.

The notice’s purpose is to describe how information is collected, making option C correct.

Purpose of 403(b) plans.

403(b) plans are retirement plans designed for public education and non-profit employees.

Eligible employers under federal tax law.

Only:

Public school systems

Certain tax-exempt organizations (501(c)(3))

are permitted to sponsor 403(b) plans.

Why the other options are incorrect.

Corporations and professional firms use 401(k) plans.

Government employers generally use 457 plans.

Self-employed and partnerships use SEP or SIMPLE plans.

Maryland producer relevance.

Producers must recommend retirement products consistent with employer eligibility to meet suitability and good-faith standards.

Conclusion.

Only school districts and certain non-profit organizations may offer 403(b) TSAs.